Is the Stock Market in a Bubble?

May 30, 2017

Charts can deceive us. The same market displayed on different scales can distort our opinion on whether the trend is up or down and how strong the trend is. In this short article, I compare and contrast the look and feel of the stock market prices on both linear and logarithmic scales.

The linear chart looks and feels like a bubble. We see the parabolic nature of the uptrend and think “I’ve seen this pattern before (in 2008 Crude Oil, 2011 Cotton, 2000 NASDAQ and others)”. In linear-scale charts, early data cannot tell the full story.

The logarithmic chart doesn’t look and feel like a bubble. Unlike the “bubble” chart, the logarithmic chart below might leave you feeling that the stock market could rally another 100% to the top green up-sloping line. Here we can get more a feel of the ups and downs, especially in the early data. We can see the tail end of the post-Great Depression recovery (1929 top to new highs in 1954); the long sideways slog that is the 1960s and 1970s; again from 2000–2014.

Charts distort our opinions and feelings about markets. Personally, I prefer to get my hands on the daily price data and not use charts at all. With the hard data, I can test different ideas and theories; not be swayed by the look of the chart or have to worry about whether the market is in a bubble or not.

Charts here: http://www.michaelmelissinos.com/blog/bubble-or/

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